Stock Buyback – Know More

If we go with the companies act 1959 there is no provision stated in it about the buyback of shares. But there had been a continuous demand to repurchase their shares from the private sector. The ordinance that is issued by the president on 31st October 1998 stated that the central government of India accepted the proposal of buyback of shares by companies. Under the companies act 1999 the companies were allowed to purchase their shares and securities that were subjected to different conditions. The provisions for the repurchase of shares were introduced on 31st  of October 1998 in the companies act 1956, the regulations were also framed by SEBI for repurchasing of securities. One important point is that companies cannot buy their shares for investment purposes. Let us see about Stock Buyback.

Stock Buyback - Know More

Objectives/Advantages of buyback

There are many objectives of buyback of shares like:

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1. To pay dividend/surplus cash to the shareholders when companies are not in losses and earning profits.

2. By promoting shareholders by giving them more money by repurchasing their shares at higher prices than the market price.

3. By creating a hike in earnings per share if there are no losses incurred during an accounting year of the company.

4. By saving tax as taxation can be avoided if the company merged with another company leads to a hike in share prices that increases the share value of the shareholder too.

Disadvantages of Stock Buyback

  1. The share buyback brings down the number of shares and conquest the market.
  2. Share buyback gives a false vision to the investors as it immediately increases the price of the share.
  3. Re-purchasing of shares displays an unrealistic picture through ratios.
  4. Buyback creates a risk of judicial error. Overvaluation and undervaluation of accounts lead to judicial error.

Types of Buyback Shares

There are two types:

  1. Tender offer
  2. Open market offer

Tender offer

The offer is given by the company to repurchase its share or any other specific securities through offering a letter from the shareholder.

Open market offer

Under open market offer company direct purchases shares from stock exchanges. Transaction of the open market offer is directly done or handled by brokers that are appointed by different companies. It is a long-term process and there is no time limit to it. In simple words, companies do not buy back shares from investors but instead purchased directly from the open market.

Why do companies buy back shares?

Since companies have to increase equity capital through the sale of equity and preference shares. It may seem to be a compulsion that they have to give their shareholders money back.

To create value/earning for their shareholders = Rise in share price

It works as follows: Whenever there is a demand that is created by a company or their shares, the price of shares increases. When a company repurchases their shares it helps in creating a hike in the price of the stock by increasing or creating a boost in demand, that is how companies increase the value for their shareholders in which dividend payments are one way to return the money to the shareholder.

Purpose

To fulfil the following purposes buyback is carried out:

  1. To increase net earnings on the share.
  2. To improve return on capital
  3. To increase the market value of the stock.

Methods of Share buyback

Buying from the open market

In this method, the company repurchase its shares directly from the market. The company’s broker executed all the transactions. Buying shares from the open market does not impose any legal obligation. The company can cancel the stock buyback at any time. As a large number of shares is to be bought, buyback shares happen over a long time.

Direct Negotiation

In a Direct Negotiation buyback method, a company directly speak to the large shareholders/investors to repurchase the company’s share from them. The main advantage is that a company can hammer out the buyback price straight with a shareholder. 

Dutch Auction tender offer

In a Dutch auction tender offer method, the company put forward a tender offer to the shareholders/investors for repurchasing shares by setting a minimum price range more than the current market price. The shareholders who want to sell their shares can mention the number of shares and the minimum price, the auction is that it permits a company to recognise the buyback price straight from shareholders.

Fixed price tender offer

In this method, the company put forward an offer to the investors for repurchasing the shares on a fixed date and price. The amount of offer always includes a premium to the share price. A fixed price tender offer completes stock buyback in a short period.

Conclusion

Section 68 of the companies act stated that the company that issued shares and bonds can go with the buyback of shares and other securities to improve the status in the stock market company prefers buybacks. Its process is very time-consuming as well as defined planning is needed. There are many good companies like TCS and Infosys that rewards their shareholder with an increase in profit/dividend of share buybacks.

Frequently Asked Questions
  1. Does Buyback is tax-free?

Yes, there is no need to pay tax on income from the buyback.

  1. Is it compulsory to sell the shares in the Buyback?

No, it does not have any compulsion.

  1. What is the limit of buyback shares?

The buyback shares should not exceed 25% of paid-up capital.

Stock Buyback – Know More

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